Bank of America to pay $8.5bn to powerful investors

Bank of America has agreed to pay $8.5bn (£5.3bn) to some of the world's most
powerful investors who lost money on mortgage-backed securities sold in the
boom before the financial crisis.

Bank of America's decision to settle marks something of a retreat for Mr Moynihan, who had said he would battle investors who had the belief: 'I bought a Chevy Vega but I want it to be a Mercedes.'Photo: ALAMY

The settlement to the nine-month long dispute was welcomed on Wall Street, where shares in America's biggest bank were up almost 3pc to $11.14 in late afternoon trading in New York.

Pacific Investment Management Company, the world's biggest bond manager, BlackRock and the Federal Reserve Bank of New York demanded last October that Bank of America buy back mortgage loans that had been packaged up as bonds and sold to them.

The bonds were originally sold by Countrywide Financial, once America's biggest mortgage lender and acquired by Bank of America in a firesale in 2008.

Including an extra $5.5bn put aside for future claims and $6.5bn to cover further mortgage writedowns and legal costs, yesterday's settlement is costing Bank of America $20bn. It will also push the bank to a second-quarter loss of up to $9.1bn, the lender said in a statement yesterday.

Despite the amounts involved, there was relief on Wall Street that the sum wasn't larger. "Investors can now start attaching a number to these unknowns and what they will cost the bank," said Paul Miller, an analyst at FBR Capital Markets. "With the swipe of a pen, they've dealt with a large chunk of these issues."

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Brian Moyinhan, the bank's under-fire chief executive, insisted that he will continue to "act aggressively, and in the best interest of our shareholders, to clean up the mortgage issues largely stemming from our purchase of Countrywide."

The $4.1bn that Bank of America paid for Countrywide in January 2008 was the last major deal engineered by former chief executive Ken Lewis.

While Mr Lewis's dealmaking helped turned Bank of America, which is based in Charlotte, North Carolina, into the biggest bank in the US, it also left a difficult legacy for his successor.

Bank of America's shares have trailed rivals such as Citigroup and JPMorgan Chase this year, and it suffered a major embarrassment when it was the only one of the country's big banks refused permission by the Federal Reserve to resume paying a dividend this year.

The settlement cover investors in 530 separate bond issues sold by Countrywide, the biggest sellers of mortgage-backed bonds in the three years before the financial crisis. The investors accused Countrywide of failing to match the promises made about the quality of the mortgage loans used in the bonds, as well as not doing enough to collect mortgage payments.

Bank of America's decision to settle marks something of a retreat for Mr Moynihan. When the news of the legal action emerged in October, he said that he would battle investors who now had the belief: "I bought a Chevy Vega but I want it to be a Mercedes."

On Wednesday he rejected suggestions that Bank of America had not fought hard over the settlement, arguing that "our job is to eliminate risks to allow this company to go forward."

Analysts said the settlement may now encourage other investors to seek recompense from other banks.